Cobo Private Salon: The FTX Incident Marks the Dawn of the End for Centralized Exchanges
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Cobo Private Salon: The FTX Incident Marks the Dawn of the End for Centralized Exchanges
"Peak creates false support, twilight bears witness to true believers."
Navigating Web3 tides with focused insights"Peak times breed false supporters; twilight reveals the true believers."
The crypto industry seems to be facing its twilight moment this year: from Luna's collapse, to 3AC’s meltdown, and then FTX’s empire crumbling—this series of negative events has cast a shadow over the entire sector’s development.
Do you still believe in Crypto?
Blindly doubling down on faith during such turbulent times is unwise. Instead, it's more important to learn from what has happened and make sound judgments about the industry’s future.
Recently, Cobo hosted a private salon where Cobo CEO & Co-Founder Shenyu, along with other seasoned industry practitioners, shared their analysis and insights on events like FTX’s collapse. The discussion covered interconnected interpretations of multiple black swan events, changes in decision-making processes at centralized institutions, and forecasts for future market trends—all valuable takeaways worth considering.
TechFlow has edited and compiled Shenyu’s key insights from the salon. Packed with substance, we share them here with our readers.
Three Black Swans Shake the Twilight of Exchanges
2022 marked a major turning point for the cryptocurrency space.
The three major black swan events—Luna, 3AC, and FTX—had destructive power and influence far exceeding previous years. Tracing back to their origins, we find that the crises were quietly brewing earlier: FTX’s collapse can be traced back to Luna’s implosion, and recently leaked internal data confirms that many of FTX’s losses originated much earlier.
Observing the root causes, those familiar with DeFi principles understand that Luna’s rapid collapse this year was a classic Ponzi scheme: an abnormal market move, a swift bank run, and within moments, a $10 billion+ market cap vanished. In this incident, many centralized institutions were poorly prepared for market volatility, leaving them exposed to significant risk—for example, 3AC quickly transformed from a risk-neutral hedge fund into a one-sided gambler.
Then came a cascade of subsequent crises.
In June, many institutional players held asymmetric positions, using high leverage to go long on Bitcoin and Ethereum, blindly believing certain price levels would never break—leading to widespread inter-institutional lending. Then came the 3AC crisis. By September, as Ethereum completed its Merge, signs of market recovery emerged—but then another unexpected event triggered FTX’s downfall.
From CZ’s perspective, the FTX incident might have been normal business competition—an attempt to sabotage a rival’s fundraising round. But the situation unexpectedly sparked panic, exposing Sam’s massive financial hole, triggering a rapid wave of fear-driven withdrawals, and ultimately leading to the swift collapse of FTX’s commercial empire.
Across these three major black swan events this year, several notable yet often overlooked points are worth deep reflection:
First, even institutions can go bankrupt.
Especially large Western institutions, after a flood of institutional users entered the space in 2017, the industry became highly correlated with U.S. equities.
For retail or individual investors, these institutions appear mysterious and bring substantial capital and expertise. However, judging from this year’s black swan events, many North American institutions fundamentally misunderstood risk management and the nature of the Crypto world, resulting in numerous accidents and cascading effects across institutions.
Thus, our conclusion is clear: Institutions can go bankrupt and restructure; unsecured credit lines between institutions are highly contagious.
Second, quant funds and market makers also suffer heavy losses during extreme events.
During sharp price swings—especially declines—market trust in institutions evaporates. This leads to mass capital flight and severe liquidity shortages, forcing many market-making teams to involuntarily convert highly liquid assets into illiquid ones, eventually becoming locked up and unable to withdraw.
Across multiple black swan events, numerous such market-making and quant teams have been affected.
Third, asset management (AM) firms face shocks too.
AM teams must seek low-risk or risk-free yields across markets to generate investor returns. There are essentially only two ways to achieve alpha: lending and token issuance.
The former generates yield by providing market liquidity; the latter issues tokens through consensus mechanisms (e.g., PoW), ICOs, or DeFi initial mining opportunities. Over time, AM operations accumulate large volumes of loaned assets and related derivatives. When a black swan event like institutional insolvency occurs, these loaned assets trigger chain reactions, suffering massive impacts under extreme market conditions.
This inevitably brings to mind traditional financial markets.
The crypto market has developed rapidly—over the past decade, it may have gone through what took traditional finance over two centuries. Alongside its success stories are recurring problems seen throughout financial history. For instance, the kind of bank behavior involving looting commercial loans occurred again in the FTX case. And all of this appears to point directly to operational flaws within centralized institutions.
Meanwhile, the FTX incident essentially marks the beginning of the end for centralized exchanges. Globally, there is now extreme anxiety regarding the opacity of crypto, especially CEXs, and the potential for cascading fallout. On-chain data supports this view: over the past month, massive user asset migrations have occurred across blockchains.
Before the twilight, private keys lost the battle against human nature:
While ownership of underlying assets in the crypto world is secured via private keys, over the past ten years of development, no proper third-party custodian has emerged to help users and exchanges manage assets and counteract human weaknesses among exchange operators, giving exchanges ongoing opportunities to access user funds.
In the FTX case, signs of human fallibility were evident long before.
Sam was never someone who could sit still. Always burning the midnight oil, refusing to let money—or himself—sit idle. During DeFi Summer, he was frequently seen moving huge sums from FTX’s hot wallet into various DeFi protocols to mine early rewards.
When human ambition craves more opportunity, temptation becomes harder to resist.
It seemed natural to use user deposits sitting in exchange hot wallets to earn risk-free (or low-risk) returns—staking, farming DeFi yield, investing in early-stage projects. As profits grew, so did the temptation to misuse funds.
These black swans turned the industry upside down, leaving behind unmistakable lessons: regulators and large institutions should learn from traditional finance by finding appropriate methods to prevent CEXs from simultaneously acting as exchange, broker, and third-party custodian; technical solutions are also needed to separate custody from trading activities, ensuring no conflict of interest. Regulatory intervention may even be necessary.
Beyond CEXs, other centralized institutions facing industry upheaval may also need to evolve.
Centralized Institutions: From “Too Big to Fail” to Rebuilding the Path Forward
The black swans didn’t just shake CEXs—they also impacted related centralized institutions. A major reason they were caught in the crisis was overlooking counterparty risks (especially from CEXs). "Too big to fail" was how most people viewed FTX. This is the second time Shenyu has heard this phrase: in early November, most participants in certain group chats voted that FTX was “too big to fail.”
The first time? Su Zhu told Shenyu personally: "Luna is too big to fail—if it collapses, someone will come to save it."
May: Luna fell.
November: FTX’s turn.
In traditional finance, there's a lender of last resort. When major financial institutions face turmoil, third parties—even government-backed entities—often step in to restructure and mitigate damage. Unfortunately, crypto lacks such a mechanism. Because the crypto world is inherently transparent, people analyze on-chain data through technical means, causing collapses to unfold extremely fast—just a few clues, then chaos erupts.
This phenomenon is a double-edged sword—both good and bad.
On the positive side, it accelerates the bursting of unhealthy bubbles, swiftly eliminating unsustainable structures. On the downside, it leaves little room for less vigilant investors to react.
Throughout this market evolution, Shenyu maintains his earlier view: the FTX incident essentially signals the twilight of centralized exchanges. In the future, they will gradually退化 into bridges connecting fiat and crypto worlds, handling KYC and deposit/withdrawal functions through traditional approaches.
Compared to traditional models, Shenyu favors more transparent, on-chain operational methods. As early as 2012, discussions about on-chain finance existed, but limited technology and performance hindered viable implementations. With advances in blockchain scalability and private key management, decentralized finance—including decentralized derivatives exchanges—is gradually rising.
As the game enters the second half, centralized institutions must rebuild amid aftershocks. And the foundation of rebuilding remains control over asset ownership.
Therefore, adopting currently popular MPC-based wallet technologies to interact with exchanges is a solid choice. Institutions retain control over their own assets while leveraging third-party co-management and exchange co-signing for secure transfers and trades—limiting exposure to brief time windows and minimizing counterparty risk and systemic contagion.
Decentralized Finance: Seeking Opportunity Amid Crisis
With CEXs and centralized institutions deeply wounded, is DeFi in better shape?
As vast amounts of capital flee the broader crypto ecosystem and macroeconomic conditions face rising interest rates, DeFi is undergoing significant pressure: overall yields currently lag behind U.S. Treasury bonds. Additionally, investors must contend with smart contract security risks. Considering both risk and return, DeFi’s current state appears less than promising to seasoned investors.
Yet, even amid pessimism, innovation continues to simmer.
For example, decentralized exchanges focused on financial derivatives are emerging, and innovations around fixed-income strategies continue evolving rapidly. As public chain performance bottlenecks ease, Shenyu believes DeFi interaction patterns and possible forms will undergo new iterations.
But this evolution won't happen overnight. The current market remains in a delicate phase: due to black swan events, crypto market makers suffered losses, severely depleting market liquidity—meaning extreme cases of market manipulation occur more frequently.
Assets that once enjoyed strong liquidity are now easily manipulated; when price manipulation occurs, because DeFi protocols are heavily composable, many entities unknowingly suffer from third-party token price fluctuations, ending up with liabilities despite doing nothing wrong.
Under such market conditions, investment strategies may become more conservative.
Currently, Shenyu’s team prefers more stable investment methods, earning incremental asset gains through staking. Internally, they’ve also developed a system called Argus to monitor on-chain anomalies in real-time, improving operational efficiency through semi-automated processes. As industry veterans adopt cautiously optimistic views toward DeFi, we wonder when the market will finally turn.
Hoping for Market Recovery: Both Internal and External Factors Are Essential
No one enjoys living through constant crisis. Instead, everyone hopes for a turnaround. But to predict when winds will shift, we must first understand where they originate.
Shenyu believes the previous market surge was largely driven by traditional investors entering in 2017. Their large capital inflows, combined with favorable macro conditions, fueled a bull run. Now, perhaps only when interest rates drop significantly will fresh capital flow back into crypto, marking the end of the bear market.
Moreover, based on rough estimates, Shenyu thinks the total daily cost—including miners and industry participants—is roughly between tens of millions to $100 million USD. Current on-chain funding flows show daily inflows fall far short of estimated costs, indicating the market remains in a zero-sum game phase.
Tightening liquidity and zero-sum dynamics represent external factors hindering recovery. The internal catalyst for upward momentum lies in breakthrough applications that create new growth engines.
After narratives from the last bull cycle faded, the industry still hasn’t clearly identified a new driver. While ZK rollups and Layer 2 networks are rolling out, bringing tangible improvements in public chain performance, no definitive killer app has emerged. At the user level, we still don’t know what application form will draw mainstream users’ assets into crypto. Therefore, two prerequisites must align for the bear market to end: easing macro tightening, and emergence of a new killer app driving explosive growth.
However, market reversals must also align with crypto’s inherent cycles. Consider Ethereum’s Merge in September 2022 and Bitcoin’s upcoming halving in 2024—both pivotal events. One has passed, the other isn’t far off. Within this timeline, there’s limited room left for application breakthroughs or narrative explosions.
If external macro trends and internal innovation fail to synchronize, the long-held belief in a four-year cycle may break. Whether the bear market extends beyond its usual span remains to be seen. With both internal and external factors essential for recovery, we should build patience and adjust investment strategies and expectations accordingly to navigate greater uncertainty.
Things never go smoothly. May every participant in the crypto industry become a diligent builder, not a passive bystander missing their chance.
Appendix: Highlights from the AMA Session
Q1: What are the main directions for future innovation in the crypto market?
Looking ahead, the crypto market revolves around two major tracks—or rather, the entire industry over the past decade has evolved around two core issues:
The first is performance—specifically TPS. From 2017’s scaling debates to today, multi-layer architectures remain the dominant solution. Among Layer 2 options, zk-based solutions hold the greatest promise, though full adoption and usability may still take at least two years.
The second key direction is balancing security and usability of private keys—the foundational layer of crypto. This is an old but persistent challenge, the primary barrier preventing mass new user adoption. With increasing inflows of traditional capital and new users over the past five years—from GameFi to apps like StepN—MPC-based passwordless wallets may offer a better balance between user experience and accessibility. Long-term, these two areas represent the most critical challenges the industry must solve.
Q2: How do you view the current market? Where is it headed?
The industry is currently in a zero-sum market state. Capital outflows remain severe—undoubtedly, we’re in a bear market, with prices down sharply. Compared to previous downturns, drawdowns hover around 80%. Predicting exactly when the bottom will arrive is difficult. Even if we're not at the absolute bottom, we’re likely in the bottom range—but how long this lasts, what triggers the next shock, requires ongoing observation rather than guesswork.
I see two potential turning points. The first is the end of the current rate-hiking cycle.
Historically, rate-hike cycles last at least a year. If hikes began in March 2022, the cycle likely won’t end until mid-2023. From an industry standpoint, we’ll need a new growth catalyst to attract fresh capital—this requires close monitoring. Will prices fall further? Are more black swans coming? Unclear. But undoubtedly, valuations are already very low. Looking at another indicator—miners—we see classic signs of a bottom: mining revenue barely covers marginal costs, and many miners can no longer afford electricity bills.
But I want to note: this cycle’s miners survived China’s 2021 mining ban, so ~80% are now based in developed countries. Their hosting agreements often prohibit flexible power shutdowns, meaning many won’t shut down even at a loss. Thus, hash rate may only dip slightly—we saw minor difficulty adjustments last week.
Another unique aspect of North American mining: during the last bull market, many miners took out machine-backed or unsecured loans. While we haven’t seen mass miner sell-offs, two interesting phenomena stand out: first, many mining farms are undergoing bankruptcy restructuring—a distinctly Western approach. Second, used ASIC prices have dropped from dozens of dollars per TH to around $10 per TH, already below production cost.
So from the supply and miner perspective, the capitulation zone has been reached. I’m confident we’re near the bottom. But how long the bear lasts depends on spotting the inflection point. For individual investors, this is an excellent opportunity—many institutional players are already underwater, some bankrupt.
During such bloodbaths, if you have non-essential reserve cash, consider dollar-cost averaging into positions. Over the long term, this should pay off—though the cycle could last one to five years.
Q3: Signature Bank plans to sell $10B in crypto deposits. Is this a landmark event? Could it tighten stablecoin liquidity? Could Signature Bank and Silvergate be impacted by FTX? What’s your take, Shenyu?
First, any large-scale stablecoin outflow is definitely symbolic. Everyone should weekly check the total circulating supply of stablecoins across the industry. Major outflows exert considerable pressure on sector-wide liquidity and pricing.
Second, based on publicly available information and data, I feel these two banks have limited exposure to FTX, so their impact should be relatively contained. They’re more traditional, and although they engage in some lending, their data looks solid.
For crypto investors, we wouldn’t typically use such banks as personal banks anyway—only for account opening and fiat gateways. So there’s no need to keep large assets there.
Q4: If CEXs want to grow in the future, what role will they play? How will they evolve?
This can be viewed from two angles.
First, due to FTX’s collapse, institutional investors have been hit hard. Going forward, regulation will tighten, especially for centralized exchanges. Historically, CEXs bundled multiple functions—but this model may soon be broken up, mirroring traditional finance’s evolutionary path. From this angle, I expect the era of monolithic CEXs to end.
Second, as decentralized derivative exchanges mature, competitive pressures will grow. Users, educated by recent events, will develop clearer understanding. Under these conditions, CEXs will play two crucial roles: First, developing traditional-finance-style solutions to help investors learn, understand, and recognize the underlying assets of the crypto world. Second, serving as core channels for deposits and withdrawals, enabling smoother, more seamless interactions between crypto and fiat systems. These should become the two most important functions of future CEXs.
Their current core trading functionality—especially derivatives—will coexist with decentralized exchanges, and may eventually be replaced.
Q5: Is Grayscale at risk of collapsing?
Current bankruptcies or distress are unlikely to trigger a Grayscale domino effect. The two companies appear cleanly separated. Based on known SEC filings and Coinbase-disclosed custodial data, Grayscale’s managed assets appear secure—unless unknown major risks emerge.
From a business standpoint, Grayscale is a strong cash cow. Given DCG (Genesis’ parent company) faces significant debt, it might sell Grayscale. Meanwhile, well-capitalized firms or conglomerates may recognize its value and initiate acquisitions.
Based on known data, I don’t see a high likelihood of Grayscale collapsing. However, its secondary market discount may persist for some time due to liquidity and fear—so colleagues considering arbitrage opportunities should proceed carefully, as this cycle could be prolonged.
Regarding predictions of further chain reactions—who else might collapse? From current knowledge, visible risks are limited. Centralized entities remain complex black boxes. It takes time and effort to trace address relationships and asset movements to uncover underlying logic.
Some undisclosed incidents may still be unfolding. But the worst, largest-scale ones seem behind us. Smaller, medium-sized collapses—like 3AC, which followed Luna’s fallout—may still occur.
Likely, if smaller exchanges start collapsing over the next one or two months, it’ll stem from FTX’s ripple effects—gradually exposing long-tail affiliated companies within 1–2 months.
Q6: What is Cobo’s MPC solution? How does it meet market needs?
Cobo has long focused on private key management and on-chain risk mitigation. Since 2018, we’ve invested deeply for three to five years, continuously exploring the ultimate form of private key management, possible on-chain interactions, and internal risk controls for organizations. After over two years of thinking, our strategy crystallized into what we call Cobo’s Three-Step Plan:
Step One: A fully centralized solution—Cobo WaaS (Wallet as a Service). We package core blockchain interactions—private key management, chain connectivity, anomaly monitoring (e.g., hard forks)—into a standard API service. Institutional clients can connect to dozens of public chains, support multiple tokens, and easily build on top—our earliest purely centralized offering.
We built Loop clearing networks to reduce redundant wallet infrastructure work. Our goal: provide standardized interfaces so everyone can seamlessly integrate with various blockchains to use asset transfer, storage, and receipt features.
Stage Two: As blockchain tech advanced and DeFi Summer arrived, new on-chain interaction scenarios emerged. Beyond basic transfers, driven by internal needs, we developed an early version of Cobo Argus—essentially a multi-user, multi-role system for collaborative on-chain asset management. Traditional multisig gives equal authority to all admins, requiring unanimous approval for every action, greatly reducing team efficiency.
Our on-chain solution uses smart contracts to assign different permissions to different users: one person manages funds (send/receive); another handles hedging specific tokens with rate limits; others claim yields, etc.
By defining distinct roles and permissions for various scenarios, we encapsulate complex DeFi interactions, enabling teams to match internal workflows, manage protocol risks, and monitor via dashboards.
Stage Three: Once blockchain performance improves and multi-chain, multi-layer ecosystems emerge, we aim to leverage our MPC expertise. After iterating for nearly half a year, we’re building Cobo Chain—a decentralized custody application chain. Using blockchain consensus to coordinate MPC nodes, private keys are distributed globally from day one, programmatically managing workflows and risks.
This vision is longer-term. But post-FTX, demand for asset security and private key management surged. We quickly repackaged our MPC tech from the application chain into a Cobo MPC WaaS product, now engaging institutional investors to tailor solutions—from custom setups to standardized MPC, Super Loop clearing networks, etc. We’re actively refining the product. The end goal: a decentralized custody chain capable of meeting diverse cross-chain demands from day one.
We can also embed standardized financial models—proven in traditional finance—natively into the chain. Still early stage—internal brainstorming and prototyping underway. Open to collaboration.
Q7: Could another massive shock happen again?
I don’t see another huge bomb right now, but aftershocks will continue. This year’s three black swans involved billions in scale—unimaginable in frequency and interconnectivity. Among well-known crypto institutions, few survivors remain. Based on known info, no major open risks are visible. But tighter regulation could bring new shocks. Watch closely.
Q8: Is now a good entry point? Why?
First, we’re in a bear market bottom zone—but duration unknown. Priority one: preserve cash flow. Assess your financial stability and prepare for a pessimistic outlook.
If your cash flow is stable and survival isn’t under pressure, consider phased allocation starting now or after March next year—target major assets like Bitcoin and Ethereum. Also consider newer protocols and projects that remained active and grew during the bear market. Valuations are much lower than in bull runs—ideal for gradual accumulation.
Also watch for new growth drivers or killer apps. If one emerges, deploying capital at low cost could yield strong returns in the next cycle.
Q9: How should institutions prepare to enter DeFi?
I see four major DeFi directions: First, stablecoins. Recently, innovative ones like Aave and Curve’s stablecoins have emerged.
Second, lending. After stablecoins mature, lending follows. Despite extreme conditions, on-chain lending performed relatively well—though issues surfaced. Teams now have clarity on iteration paths and isolating bad assets. We’re watching the next evolution of lending.
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